JUSTICE V.K.JAIN (ORAL)

Applications for Condonation of delay

There is a delay of 26 days in filing the appeal by the Oriental Insurance Co. and 368 days by M/s Gayatri Capital Ltd.   For the reasons stated in the applications, the said delay is condoned. The applications stand disposed of.

FA/128/2008 & FA/51/2009

The complainant - M/s Gayatri Capital Ltd.  which is the respondent in FA/128/2008 and appellant in FA/51/2009 is a member of National Stock Exchange  and is engaged in buying and selling of shares of behalf of its clients. It  obtained a Stockbrokers  Indemnity Insurance Policy for NSE members from Oriental Insurance Co. Ltd. which is appellant in FA/128/2008 and respondent in FA/51/2009. The complainant had a net sale obligation of 2079 shares of Infosys Technologies Ltd. for Settlement No.2000005,  2000006 and 2000007 during the period 26.1. 2000 to 15.2.2000.  Infosys Technologies Ltd. had announced split of its shares from Rs.10 to Rs.5 and had fixed February 11, 2000 as the record date for this purpose. There was a No Delivery Period fixed by NSCCL for the normal physical segment from 26.1.2000 to 8.2.2000. The first Demat pay-in after the record date was fixed  for  February 22, 2000. Vide its Circular dated 18.1.2000 sent to all the members/custodians National Securities Clearing Corporation Ltd. (NSCCL) instructed as under:-

“As per the procedure of the Clearing Corporation, clearing members can claim margin benefits by making early pay-in of securities as per their securities pay-in obligation in a given settlement. The Clearing Members however shall be having old/existing lSIN of Infosys Technologies Ltd. to make any early pay-in in Settlement nos. N-2000005, N-2000006 and N- 2000007. In order to enable members to effect early pay-in of securities and avail benefit in terms of margin and exposure limits, the Clearing Members can effect the pay-in of securities to the CM Pool A/c of NSCCL detailed as under from the beneficiary accounts. Members are further advised to give only Delivery Out instructions for making early pay-in of the security in old ISIN after adjusting for the conversion / stock split vis a vis the sale obligation position. A copy of the Delivery Out instructions should be faxed to the Margin Section addressed to Mr. Raj Kumar / Ms. Srividya to claim the benefits of early pay-in.

The details of account no. and instruction to be given are as under:

CM BP ID              : IN 510389                  CM Name  : NSCCL

Market Type          : Normal Physical Settlement No.  : 2000007

It may be noted that delivery out instructions are to be given in the above account of NSCCL only. Instructions given to any other accounts of NSCCL shall not be processed and shall be treated as non-delivery of securities and dealt accordingly.”

2.      The complainant submitted 2079 shares of Infosys Technologies Ltd. but despite the above-referred instructions issued by NSCCL, the shares were delivered to the CC Pool account and not to the CM Pool account. Moreover instead of giving the said shares with Delivery Out instructions, they were given with Irreversible Delivery Order (IDO). As a result, the shares could not be sold on the stipulated date and an auction was held by National Stock Exchange (NSE) for making up the deficiency of the said shares in the account of the complainant. The complainant claims to have suffered  net loss of Rs.2515648/- on account of the debit made by National Stock Exchange in its account.

3.      Claiming that the loss suffered by it was covered under the insurance policy taken by it, the complainant lodged a claim with the insurer. The said claim, however, was repudiated vide letter dated 30.8.2004 which to the extent, it is relevant reads as under:-

“Further as per the circular, the clearing members were advised to give early pay in of Infosys Technology  shares to the CM pool account of NSCCL with CMPID: IN510389 CM Name. The members were also advised to give only Delivery out instruction for early pay in, instead of IDO (irreversible delivery order) after adjusting for the conversion/stock split against the sale obligation. Instructions given to any other accounts of NSCCL shall not be processed and shall be treated as non-delivery of securities and dealt accordingly.

Despite this an early pay in was made by you for 1700 shares of Infosys under IRREVERSIBLE DELIVERY INSTRUCTION Completely ignoring the above circular.

The surveyor discussed the matter with NSCCL executives and was advised that :

i) the shares were not delivered to the designated account to be eligible for automatic adjustment, on the day of pay-in.

ii) Once the shares are transferred by way of IDO instruction and are accepted by the system, nobody can access these shares due to built in securities in the system.

The cause of loss is complete disregard to follow the instructions given vide NSCCl’s circular dated 18.1.2000. You have made Infosys pre pay-in in the usual manner as you have been doing in the past. After doing so, you requested NSCCL to intervene and rectify your mistake. Probably you failed to understand the gravity of this negligence. This pre-pay required special attention as :

• It was a high value scrip (value ranging between Rs.8000 to Rs.9000).

• The quantity was also huge (1700 shares)

• The scrip was in no delivery period.

• It was under split with the record date of 12.2.2000.

• NSCCL had promptly issued the said circular well in advance of the no delivery period which was from 26.1.2000 to 8.2.2000.

Failure to go through and act according to the circular issued does not conform to negligent act and negligent error. The circular was issued by the Clearing House which is an important regulatory body. Your inability to adhere to same amounts to willful disregard and not negligence. Further, “ignoring of law is not an excuse”. This loss attracts Exclusion no.11 – the knowing failure of the Assured to comply with the provisions of any statute, including any regulations made thereunder, or with any laws, regulations or requirements laid down by any regulatory or supervisory body or, agency, whether governmental or otherwise.

Hence, it does not fall within the purview of the policy. The competent has decided to reject liability and close this claim as “NO CLAIM”.

4.      Being aggrieved from the rejection of the claim, the complainant approached the concerned State Commission by way of a consumer complaint.

5.      The complaint was resisted by the insurer interalia on the ground that in view of the Exclusion  Clause 11 of the insurance policy, the insurer was not liable to indemnify  the complainant.

6.      The State Commission vide impugned order dated 4.1.2008  directed the insurer to pay a sum of Rs.2182315/- to the complainant alongwith interest @ 9% p.a. from the date of repudiation of the claim and costs assessed at Rs.5,000/-. Being aggrieved from the order passed by the State Commission, the insurer is before this Commission by way of FA/128/2008. Since the complainant is also dissatisfied with the quantum of the compensation awarded to it by the State Commission, it is also before this Commission by way of FA/51/2009.

7.      Clause 3 of the insurance policy on which reliance is placed by the complainant in support of its claim, reads as under:-

“This Section is to indemnify the assured against their legal liability to third parties to pay compensatory damages, including the claimants cost, for any claims made against them as a consequence of transactions entered by the assured on the National Stock Exchange during the period of insurance stated in the schedule and notified to Underwriters during that period. It is agreed that the transactions on the National Stock Exchange are extended to include the transactions on the Automatic Lending Borrowing Mechanism (ALBM) segment of the Exchange and subject to the provisions of clause (a) under Additional Exclusions in respect of Section 3 - Errors & Omissions and Part-l of the policy.”

8.      Clause 11 of the Exclusions on which reliance is placed by the insurer, reads as under:-

“Exclusions in respect of Part I and Part II of the Policy

Underwriters shall not be liable for:-

11.        the knowing failure of the Assured to comply with the provisions of any statute, including any regulations made thereunder, or with any laws, regulations of requirements laid down by any regulatory or supervisory body or, agency, whether governmental or otherwise.”

9.      It would thus be seen that though the insurer was liable to indemnify the insured in respect of any legal liability of the insured to a third party, as a consequence of any transaction entered by the insured on the National Stock Exchange, it was not be liable to reimburse the insured in case the loss was covered under any of the Exclusions contained in the insurance policy. The Exclusions applied to the claims under Part 1 and Part 2 of the policy and Section 3 on which reliance is placed by the complainant is included in part 1 of the said policy. It is evident from a careful analysis of Clause 11 of the Exclusions that if the inured knowingly fails to comply interalia  with any requirements laid down by any regulatory or supervisory body or agency, the loss suffered by him on account of such failure will not be reimbursable. Undisputedly NSCCL is a body or agency set up for regulating or supervising the work of the stock exchanges including National Stock Exchange and that was the reason it had issued the circular dated 18.1.2000 to all the members/custodians informing them of the procedure for claiming margin benefits by making early pay-in of the securities. It was clearly stipulated by NSCCL that for the purpose of early pay-in of the securities and to avail benefit of the margin and exposure limits, the members had to give the securities to the CM Pool account of NSCCL as detailed in the circular. Moreover, they were to advise giving only Delivery-Out instructions for making early pay-in of the security. It was also stated in the above-referred circular that instructions given to any other account of NSCCL shall not be processed and shall be treated as non-delivery of the securities and dealt accordingly. The complainant failed to comply with the instructions issued by NSCCL since the securities were given to the CC account instead of giving them to CM account and the securities were not given for delivery only. They were rather given with Irreversible Delivery Order (IDO) instructions. This was also contrary to the instructions issued by NSCCL. The complainant having failed to comply with the instructions issued by NSCCL vide its circular  dated 18.1.2000, the claim was clearly governed by Clause 11 of the Exclusions  and therefore, was not payable. The State Commission, however, did not examine the claim in the light of the Clause 11 of the Exclusions. The impugned order, therefore, cannot be sustained and the same is liable to be set aside.

10.    For the reasons stated hereinabove, FA/128/2008 filed by the Oriental Insurance Co. is allowed whereas FA/51/2009 filed by M/s Gayatri Capital Ltd.  is dismissed. The consumer complaint filed by M/s Gayatri Capital Ltd.   stands dismissed with no order as to costs. Both the appeals stand disposed of.